Edgar Filing: COMMUNITY FIRST BANCORP

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended September 30, 2010 Commission File No. 000-29640

COMMUNITY FIRST BANCORPORATION

___________________________________________________________________________________________________________________

(Exact name of registrant as specified in its charter)

South Carolina		58-2322486
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

449 HIGHWAY 123 BYPASS

SENECA, SOUTH CAROLINA 29678

______________________________________________________________________________________________________________________

(Address of principal executive offices, zip code)

(864) 886-0206

______________________________________________________________________________________________________________________

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ] (Not yet applicable to Registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [ X ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, no par or stated value, 3,784,159 Shares Outstanding on November 1, 2010

COMMUNITY FIRST BANCORPORATION

FORM 10-Q

Index

Page

Item 1.	Financial Statements

	Consolidated Balance Sheets	4
	Consolidated Statements of Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4T.	Controls and Procedures	29

PART II -	OTHER INFORMATION

Item 6.	Exhibits	30

SIGNATURE		31

PART I – FINANCIAL INFORMATION

Item 1. - Financial Statements

COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
	(Unaudited)
	September 30,			December 31,
	2010			2009
	(Dollars in thousands, except per share)
Assets
Cash and due from banks	$	1,801		$	1,463
Interest bearing balances due from banks		30,193			46,020
Cash and cash equivalents		31,994			47,483
Securities available-for-sale		187,311			141,710
Securities held-to-maturity (fair value $7,614 for 2010
and $9,476 for 2009)		7,128			9,024
Other investments		1,213			1,307
Loans		261,904			267,248
Allowance for loan losses		(6,336	)		(6,052	)
Loans - net		255,568			261,196
Premises and equipment - net		8,264			8,470
Accrued interest receivable		3,195			2,424
Foreclosed assets		8,553			6,078
Bank-owned life insurance		9,562			9,289
Other assets		3,834			5,916
Total assets	$	516,622		$	492,897

Liabilities
Deposits
Noninterest bearing	$	44,531		$	47,067
Interest bearing		413,847			389,581
Total deposits		458,378			436,648
Accrued interest payable		2,436			2,043
Long-term debt		6,500			8,000
Other liabilities		1,966			1,388
Total liabilities		469,280			448,079

Shareholders' equity
Preferred stock - Series A - non-voting 5% cumulative - $1,000 per share
liquidation preference; 5,000 shares authorized;
issued and outstanding - 3,150 shares		3,126			3,126
Preferred stock - no par value; 9,995,000 shares authorized;
None issued and outstanding		-			-
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding - 3,784,159 for 2010 and
3,782,415 for 2009		38,940			38,923
Additional paid-in capital		748			748
Retained earnings		2,308			1,434
Accumulated other comprehensive income (loss)		2,220			587
Total shareholders' equity		47,342			44,818
Total liabilities and shareholders' equity	$	516,622		$	492,897


See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
	(Unaudited)
	Period Ended September 30,
	Three Months					Nine Months
	2010			2009		2010			2009
	(Dollars in thousands, except per share)
Interest income
Loans, including fees	$	4,068		$	4,214	$	12,125		$	12,460
Interest bearing balances due from banks		28			14		98			36
Securities
Taxable		1,258			1,298		3,875			4,260
Tax-exempt		188			201		584			612
Other investments		1			3		3			3
Federal funds sold		-			-		-			3
Total interest income		5,543			5,730		16,685			17,374
Interest expense
Time deposits $100M and over		806			904		2,285			2,987
Other deposits		1,303			1,709		4,158			5,282
Long-term debt		70			93		219			275
Total interest expense		2,179			2,706		6,662			8,544
Net interest income		3,364			3,024		10,023			8,830
Provision for loan losses		1,025			1,010		3,275			2,460
Net interest income after provision		2,339			2,014		6,748			6,370
Other income
Service charges on deposit accounts		319			377		929			1,048
Debit card transaciton fees		183			154		533			450
Net gains (losses) on sales of securities
available-for-sale		-			-		-			90
Increase in value of bank-owned
life insurance		90			91		272			274
Other income		76			82		162			165
Total other income		668			704		1,896			2,027
Other expenses
Salaries and employee benefits		1,205			1,206		3,528			3,631
Net occupancy expense		133			132		416			401
Furniture and equipment expense		95			94		281			287
Amortization of computer software		97			112		306			319
Debit card transaction expenses		120			101		343			315
Directors' fees		49			28		127			85
FDIC insurance assessment		233			165		866			535
Other expense		558			459		1,571			1,247
Total other expenses		2,490			2,297		7,438			6,820
Income before income taxes		517			421		1,206			1,577
Income tax expense		131			101		214			354
Net income		386			320		992			1,223
Deductions for amounts not available to common shareholders:
Dividends declared or accumulated on
preferred stock		(39	)		-		(138	)		-
Net income available to common shareholders	$	347		$	320	$	854		$	1,223

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION

Consolidated Statements of Income - continued

Unaudited)

Period Ended September 30,

Three Months

Nine Months

2010

2009

2010

2009

(Dollars in thousands, except per share)

Per common share*
Net income	$	0.09	$	0.08	$	0.23	$	0.32
Net income, assuming dilution		0.09		0.08		0.23		0.32
__________________
* Per common share information has been retroactively adjusted to reflect a 5% stock dividend effective December 15, 2009.

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)
												Accumulated
	Shares of						Additional					Other
	Common		Preferred		Common		Paid-in		Retained			Comprehensive
	Stock		Stock		Stock		Capital		Earnings			Income (Loss)			Total
	(Dollars in thousands)

Balance, January 1, 2009		3,564,279	$	-	$	37,084	$	748	$	1,769		$	327		$	39,928
Comprehensive income:
Net income		-		-		-		-		1,223			-			1,223
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $630		-		-		-		-		-			1,126			1,126
Reclassification adjustment,
net of income tax effects of $32		-		-		-		-		-			(58	)		(58	)
Total other comprehensive income																1,068
Total comprehensive income																2,291
Exercise of employee stock options		45,532		-		486		-		-			-			486
Balance, September 30, 2009		3,609,811	$	-	$	37,570	$	748	$	2,992		$	1,395		$	42,705



Balance, January 1, 2010		3,782,415	$	3,126	$	38,923	$	748	$	1,434		$	587		$	44,818
Comprehensive income:
Net income		-		-		-		-		992			-			992
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $914		-		-		-		-		-			1,633			1,633
Total other comprehensive income																1,633
Total comprehensive income																2,625
Dividends paid on preferred stock		-		-		-		-		(118	)		-			(118	)
Exercise of employee stock options		1,744		-		17		-		-			-			17
Balance, September 30, 2010		3,784,159	$	3,126	$	38,940	$	748	$	2,308		$	2,220		$	47,342



See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
	(Unaudited)
	Nine Months Ended
	September 30,
	2010		2009
	(Dollars in thousands)
Operating activities
	$	992	$	1,223
Net income

Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses		3,275			2,460
Depreciation		287			293
Amortization of net loan (fees) and costs		(59	)		(105	)
Securities accretion and premium amortization		1,079			576
Net (gains) on sales of securities available-for-sale		-			(90	)
Net (gains) on sales of foreclosed assets		(7	)		(4	)
Increase in value of bank-owned life insurance		(273	)		(274	)
(Increase) decrease in interest receivable		(771	)		34
Increase (decrease) in interest payable		393			(723	)
Decrease in prepaid expenses and other assets		1,168			258
Increase in other accrued expenses		578			610
Net cash provided by operating activities		6,662			4,258

Investing activities
Purchases of available-for-sale securities		(144,027	)		(121,643	)
Maturities, calls and paydowns of securities available-for-sale		99,895			95,545
Maturities, calls and paydowns of securities held-to-maturity		1,895			2,316
Proceeds of sales of securities available-for-sale		-			5,853
Purchases of other investments		-			(125	)
Proceeds from sales of other investments		94			38
Net increase in loans made to customers		(618	)		(5,105	)
Purchases of premises and equipment		(81	)		(177	)
Proceeds of sale of foreclosed assets		591			463
Additional investments in foreclosed assets		(29	)		(244	)
Proceeds of redemption of bank-owned life insurance		-			1,062
Investment in bank-owned life insurance		-			(1,500	)
Net cash used by investing activities		(42,280	)		(23,517	)

Financing activities
Net decrease in demand deposits, interest
bearing transaction accounts and savings accounts		(4,542	)		(14,506	)
Net increase in certificates of deposit and other
time deposits		26,272			16,185
Net increase in short-term borrowings		-			1,710
Repayments of long-term debt		(1,500	)		-
Cash paid in lieu of issuing fractional shares		-			(3	)
Dividends paid on preferred stock		(118	)		-
Exercise of employee stock options		17			486
Net cash provided by financing activities		20,129			3,872
Decrease in cash and cash equivalents		(15,489	)		(15,387	)
Cash and cash equivalents, beginning		47,483			40,966
Cash and cash equivalents, ending	$	31,994		$	25,579

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows - continued


	(Unaudited)
	Nine Months Ended
	September 30,
	2010	2009
	(Dollars in thousands)

Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest	$	6,269	$	9,267
Income taxes		68		27
Net transfers from loans to foreclosed assets		3,030		3,371
Noncash investing and financing activities:
Other comprehensive income		1,633		1,068

See accompanying notes to unaudited consolidated financial statements.

COMMUNITY FIRST BANCORPORATION

Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share)

Accounting Policies – A summary of significant accounting policies is included in Community First Bancorporation’s (the “Company,” “our’” “we,” “us,” and similar references) Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission. Certain amounts in the 2009 financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on net income or retained earnings for any period.

Management Opinion – In the opinion of management, the accompanying unaudited consolidated financial statements of Community First Bancorporation reflect all adjustments necessary for a fair presentation of the results of the periods presented. Such adjustments were of a normal, recurring nature.

Investment Securities – The following table presents information about amortized cost, unrealized gains, unrealized losses and estimated fair values of securities:

	September 30, 2010
			Gross		Gross
			Unrealized		Unrealized		Estimated
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value
	(Dollars in thousands)
Available-for-sale
Mortgage-backed securities
issued by US Government agencies	$	1,196	$	63	$	-	$	1,259
Government sponsored enterprises (GSEs)		141,272		1,672		3		142,941
Mortgage-backed securities issued by GSEs		23,329		1,192		-		24,521
State, county and municipal		18,050		565		25		18,590
Total	$	183,847	$	3,492	$	28	$	187,311

Held-to-maturity
Mortgage-backed securities
issued by US Government agencies	$	-	$	-	$	-	$	-
Government sponsored enterprises (GSEs)		-		-		-		-
Mortgage-backed securities issued by GSEs		7,128		486		-		7,614
State, county and municipal		-		-		-		-
Total	$	7,128	$	486	$	-	$	7,614


	December 31, 2009
			Gross		Gross
			Unrealized		Unrealized		Estimated
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value
	(Dollars in thousands)
Available-for-sale
Mortgage-backed securities
issued by US Government agencies	$	1,426	$	49	$	-	$	1,475
Government sponsored enterprises (GSEs)		87,143		643		823		86,963
Mortgage-backed securities issued by GSEs		32,707		1,005		10		33,702
State, county and municipal		19,517		241		188		19,570
Total	$	140,793	$	1,938	$	1,021	$	141,710

Held-to-maturity
Mortgage-backed securities
issued by US Government agencies	$	-	$	-	$	-	$	-
Government sponsored enterprises (GSEs)		-		-		-		-
Mortgage-backed securities issued by GSEs		9,024		452		-		9,476
State, county and municipal		-		-		-		-
Total	$	9,024	$	452	$	-	$	9,476

The amortized cost and estimated fair value of securities by contractual maturity are shown below:

	September 30, 2010
Available-for-sale at fair value	Due within one year		Due after one through five years			Due after five through ten years		Due after ten years		Total
					(Dollars in thousands)
Non-mortgage-backed securities issued by GSEs	$	-	$	48,350		$	57,542	$	37,049	$	142,941
State, county and municpal issuers		300		848			3,238		14,204		18,590
		300		49,198			60,780		51,253		161,531
Mortgage-backed securities issued by:
US Government agencies											1,259
GSEs											24,521
Total available-for-sale										$	187,311

Held-to-maturity at amortized cost
Mortgage-backed securities issued by:
GSEs										$	7,128
Total held-to-maturity										$	7,128


	December 31, 2009
Available-for-sale at fair value	Due within one year		Due after one through five years			Due after five through ten years		Due after ten years		Total
					(Dollars in thousands)
Non-mortgage-backed securities issued by GSEs	$	1,520	$	10,032		$	32,832	$	42,579	$	86,963
State, county and municpal issuers		301		1,000			2,656		15,613		19,570
		1,821		11,032			35,488		58,192		106,533
Mortgage-backed securities issued by:
US Government agencies											1,475
GSEs											33,702
Total available-for-sale										$	141,710

Held-to-maturity at amortized cost
Mortgage-backed securities issued by:
GSEs										$	9,024
Total held-to-maturity										$	9,024

The estimated fair values and gross unrealized losses of all of the Company’s investment securities whose estimated fair values were less than amortized cost as of September 30, 2010 which had not been determined to be other-than-temporarily impaired are presented below. The Company evaluates all available-for-sale securities and all held-to-maturity securities for impairment as of each balance sheet date. The securities have been segregated in the table by investment category and the length of time that individual securities have been in a continuous unrealized loss position.


	September 30, 2010
	Continuously in Unrealized Loss Position for a Period of
	Less than 12 Months				12 Months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
					(Dollars in thousands)
Available-for-sale
US Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Government-sponsored
enterprises (GSEs)		997		3		-		-		997		3
Mortgage-backed securities
issued by GSEs		-		-		-		-		-		-
State, county and
municipal securities		162		-		485		25		647		25
Total	$	1,159	$	3	$	485	$	25	$	1,644	$	28

Held-to-maturity
GSEs	$	-	$	-	$	-	$	-	$	-	$	-
Total	$	-	$	-	$	-	$	-	$	-	$	-


	December 31, 2009
	Continuously in Unrealized Loss Position for a Period of
	Less than 12 Months				12 Months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
					(Dollars in thousands)
Available-for-sale
GSEs	$	40,430	$	823	$	-	$	-	$	40,430	$	823
Mortgage-backed securities
issued by GSEs		2,811		10		-		-		2,811		10
State, county and
municipal securities		6,220		188		-		-		6,220		188
Total	$	49,461	$	1,021	$	-	$	-	$	49,461	$	1,021

Held-to-maturity
GSEs	$	-	$	-	$	-	$	-	$	-	$	-
	$	-	$	-	$	-	$	-	$	-	$	-

As of September 30, 2010, two securities had been continuously in an unrealized loss position for less than 12 months and one security had been continuously in an unrealized loss position for 12 months or more. We do not consider these investments to be other-than-temporarily impaired because the unrealized losses involve primarily issuances of government-sponsored enterprises and state, county and municipal government issuers. We also believe that the impairments resulted from current credit market disruptions, and note that there have been no failures by the issuers to remit periodic interest payments as required nor are we aware that any such issuer has given notice that it expects that it will be unable to make any such future payment according to the terms of the bond indenture. Although we classify a majority of our investment securities as available-for-sale, management has not determined that any specific securities will be disposed of prior to maturity and believes that we have both the ability and the intent to hold those investments until a recovery of fair value, including until maturity. Furthermore, we do not believe that we will be required to sell any such securities prior to recovery of the unrealized losses. Substantially all of our holdings of state, county and municipal securities were rated at least “investment grade” by either S&P or Moody’s, or both, as of September 30, 2010.

Our subsidiary bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB”) and, accordingly, is required to own restricted stock in that institution in amounts that may vary from time to time. Because of the restrictions imposed, the stock may not be sold to other parties, but is redeemable by the FHLB at the same price as that at which it was acquired by the subsidiary. We evaluate this security for impairment based on the probability of ultimate recoverability of the par value of the investment. During the third quarter of 2010, the FHLB redeemed $94 of its stock at its redemption value. Based on these circumstances and our evaluation, no impairment has been recognized.

Nonperforming Loans – As of September 30, 2010, there were $14,962 in nonaccrual loans and no loans 90 days or more past due and still accruing interest.

Earnings Per Share – Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and any dilutive potential common shares and dilutive stock options. It is assumed that all dilutive stock options are exercised at the beginning of each period and that the proceeds are used to purchase shares of our common stock at the average market price during the period. All 2009 per share information has been retroactively adjusted to give effect to a 5% stock dividend effective December 15, 2009. Net income per common share and net income per common share, assuming dilution, were computed as follows:

	Period Ended September 30,
	Three Months				Nine Months
	2010		2009		2010		2009
	(Dollars in thousands, except per share amounts)

Net income per common share, basic
Numerator - net income available to
common shareholders	$	347	$	320	$	854	$	1,223
Denominator
Weighted average common shares
issued and outstanding		3,784,159		3,790,302		3,783,872		3,781,591

Net income per share, basic	$	.09	$	.08	$	.23	$	.32

Net income per common share, assuming dilution
Numerator - net income available to
common shareholders	$	347	$	320	$	854	$	1,223
Denominator
Weighted average common shares
issued and outstanding		3,784,159		3,790,302		3,783,872		3,781,591
Effect of dilutive stock options		-		-		-		-
Total common shares		3,784,159		3,790,302		3,783,872		3,781,591
Net income per common share,
assuming dilution	$	.09	$	.08	$	.23	$	.32

Stock-Based Compensation

Our 1998 stock option plan terminated on March 19, 2008 and no further options may be issued under the plan. As of September 30, 2010, a total of 326,946 unexpired and non-forfeited options under the plan remain exercisable until their expiration dates.

Fair Value Measurements – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. A three-level hierarchy is used for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. In developing estimates of the fair values of assets and liabilities, no consideration of large position discounts for financial instruments quoted in active markets is allowed. However, an entity is required to consider its own creditworthiness when valuing its liabilities. For disclosure purposes, fair values for assets and liabilities are shown in the level of the hierarchy that correlates with the lowest level input that is significant to the fair value measurement in its entirety.

The three levels of the fair value input hierarchy are described as follows:

Level 1 inputs reflect quoted prices in active markets for identical assets or liabilities.

Level 2 inputs reflect observable inputs that may consist of quoted market prices for similar assets or liabilities, quoted prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities being valued.

Level 3 inputs reflect the use of pricing models and/or discounted cash flow methodologies using other than contractual interest rates or methodologies that incorporate a significant amount of management judgment, use of the entity’s own data, or other forms of unobservable data.

The following is a summary of the measurement attributes applicable to financial assets and liabilities that are measured at fair value on a recurring basis:

			Fair Value Measurement at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	September 30, 2010		(Level 1)		(Level 2)		(Level 3)
			(Dollars in thousands)
Securities available-for-sale
Mortgage-backed securities
issued by US Government
agencies	$	1,259	$	-	$	1,259	$	-
Government sponsored
enterprises (GSEs)		142,941		-		142,941		-
Mortgage-backed securities
issued by GSEs		24,521		-		24,521		-
State, county and municipal		18,590		-		18,590		-
Total securities available-for-sale	$	187,311	$	-	$	187,311	$	-


			Fair Value Measurement at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
			(Dollars in thousands)
Securities available-for-sale	$	141,710	$	-	$	141,710	$	-

Level 2 inputs for our securities available-for-sale are obtained from an independent third-party that uses a process that may incorporate current market prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, other reference data and industry and economic events that a market participant would be expected to use in valuing the securities. Not all of the inputs listed apply to each individual security at each measurement date. The independent third party assigns specific securities into an “asset class” for the purpose of assigning the applicable level of the fair value hierarchy used to value the securities.

The following is a summary of the measurement attributes applicable to assets and liabilities that were measured at fair value on a non-recurring basis during the nine month period ended September 30, 2010 and the twelve month period ended December 31, 2009 and which remained outstanding at the end of each period:

Fair Value Measurement at Reporting Date Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Description

September 30, 2010

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Collateral-dependent

impaired loans

8,402

Gains and (losses) recognized during the periods ended September 30, 2010:

Three months

Nine Months

(Dollars in thousands)

Collateral-dependent impaired loans

(127

)

(961

)

Fair Value Measurement at Reporting Date Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Description

December 31, 2009

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Collateral-dependent

impaired loans

11,219

Foreclosed assets

6,078

Gains and (losses) recognized during the twelve months ended:

December 31, 2009

(Dollars in thousands)

Collateral-dependent impaired loans

Foreclosed assets

The fair value measurements shown above were made to reduce cost-based measurements to fair value measurements at initial recognition or to adjust fair value based measurements subsequent to initial recognition due to changes in the circumstances of individual assets during the period. For collateral-dependent loans, the measurements reflect our belief that we will receive repayment solely from the liquidation of the underlying collateral. As a practical expedient, such loans may be valued by comparing the fair value of the collateral securing the loan with the loan’s carrying value. If the carrying value exceeds the fair value of the collateral, the excess is charged to the allowance for loan losses. If the fair value of the collateral exceeds the loan’s carrying amount, no adjustment is made, the loan continues to be carried at historical cost, and the loan is not included in the table.

The value of other real estate obtained through loan foreclosure is adjusted, if needed, upon the acquisition of each property to the lower of the recorded investment in the loan or the fair value of the property as determined by a recently performed independent appraisal less the estimated costs to sell. Similarly, the fair value of repossessions is measured by reference to dealers’ quotes or other market information believed to reliably reflect the value of the specific property held. Immaterial adjustments may be made by management to reflect property-specific factors such as age or condition. Losses recognized when loans are initially transferred to or otherwise included in any of the categories shown above are reported as loan losses. Subsequent to initial recognition, changes in fair value measurements of other real estate and repossessions are included in other income or other expenses, as applicable.

The following table presents the carrying amounts and fair values of our financial instruments:

	September 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(Dollars in thousands)
Financial assets
Cash and due from banks	$	1,801	$	1,801	$	1,463	$	1,463
Interest bearing deposits due from banks		30,193		30,193		46,020		46,020
Securities available-for-sale		187,311		187,311		141,710		141,710
Securities held-to-maturity		7,128		7,614		9,024		9,476
Federal Home Loan Bank stock		1,213		1,213		1,307		1,307
Loans, net		255,568		256,072		261,196		262,308
Accrued interest receivable		3,195		3,195		2,424		2,424
Financial liabilities
Deposits		458,378		460,419		436,648		436,444
Accrued interest payable		2,436		2,436		2,043		2,043
Long-term debt		6,500		6,529		8,000		8,005

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms.

For cash and due from banks, interest bearing deposits due from banks and federal funds sold, the carrying amount approximates fair value because these instruments generally mature in 90 days or less. The carrying amounts of accrued interest receivable or payable approximate fair values.

The fair value of held-to-maturity mortgage-backed securities issued by Government sponsored enterprises is estimated based on dealers’ quotes for the same or similar securities.

The fair value of FHLB stock is estimated at its cost because the FHLB historically has redeemed its outstanding stock at that value.

Fair values are estimated for loans using discounted cash flow analyses, using interest rates currently offered for loans with similar terms and credit quality. We do not engage in originating, holding, guaranteeing, servicing or investing in loans where the terms of the loan product give rise to a concentration of credit risk.

The fair value of deposits with no stated maturity (noninterest bearing demand, interest bearing transaction accounts and savings) is estimated as the amount payable on demand, or carrying amount, as required by SFAS No. 157. The fair value of time deposits is estimated using a discounted cash flow calculation that applies rates currently offered to aggregate expected maturities.

The fair values of our short-term borrowings, if any, approximate their carrying amounts.

The fair values of fixed rate long-term debt instruments are estimated using discounted cash flow analyses, based on the borrowing rates currently in effect for similar borrowings. The fair values of variable rate long-term debt instruments are estimated at the carrying amount.

The estimated fair values of off-balance-sheet financial instruments such as loan commitments and standby letters of credit are generally based upon fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ creditworthiness. The vast majority of the banking subsidiary’s loan commitments do not involve the charging of a fee, and fees associated with outstanding standby letters of credit are not material. For loan commitments and standby letters of credit, the committed interest rates are either variable or approximate current interest rates offered for similar commitments. Therefore, the estimated fair values of these off-balance-sheet financial instruments are nominal.

The following is a summary of the notional or contractual amounts and estimated fair values of our off-balance sheet financial instruments:

	September 30, 2010				December 31, 2009
	Notional/		Estimated		Notional/		Estimated
	Contract		Fair		Contract		Fair
	Amount		Value		Amount		Value
	(Dollars in thousands)
Off-balance sheet commitments
Loan commitments	$	29,899	$	-	$	28,527	$	-
Standby letters of credit		846		-		873		-

New Accounting Pronouncements – In January 2010, the Financial Accounting Standards Board (“FASB”) updated Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” to require enhanced fair value disclosures. Specifically, we are, or will be, required to provide additional information about fair values and fair value measurements as follows: (1) We must provide a description of the reasons for, and the amounts of, significant transfers in and out of Level 1 or Level 2 fair value measurements, and (2) for fair value measurements using significant unobservable (Level 3) inputs, we will be required to present separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as one net number). The update requires that we expand our fair value measurement disclosures to provide information for each class of assets and liabilities. Classes are described as subsets of line items that appear in our Consolidated Balance Sheets. The update further requires that we provide additional disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements when the measurement bases are either Level 2 or Level 3 inputs. The requirements relative to presenting information about purchases, sales, issuances and settlements of fair value measurements using Level 3 inputs, will be effective for interim and annual periods of fiscal years beginning after December 15, 2010. The other enhanced disclosures are required to be, and have been, presented in interim and annual periods beginning after December 15, 2009.

In July 2010, FASB issued Accounting Standards Update 2010-20 which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of this update is to improve financial statement users’ understanding of the nature of an entity’s credit risk related to its financing receivables and the entity’s assessment of that risk in estimating its allowance for losses, changes in the allowance, and the reasons for those changes. The majority of the new disclosures will be required to be included in our year-end 2010 financial statements with the remainder required to be first presented in our financial statements for the first quarter of 2011.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the securities laws. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.

All statements that are not historical facts are statements that could be "forward-looking statements." You can identify these forward-looking statements through the use of words such as "may," "will," "should," "could," "would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek," "plan," "predict," "target," "potential," "believe," "intend," "estimate," "project," "continue," or other similar words. Forward-looking statements include, but are not limited to, statements regarding the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, business operations and proposed services.

These forward-looking statements are based on current expectations, estimates and projections about the banking industry, management's beliefs, and assumptions made by management. Such information includes, without limitation, discussions as to estimates, expectations, beliefs, plans, strategies, and objectives concerning future financial and operating performance. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks and uncertainties include, but are not limited to:

·	future economic and business conditions;

·	lack of sustained growth and disruptions in the economies of the Company's market areas;

·	government monetary and fiscal policies;

·	the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

·	the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services, as well as competitors that offer banking products and services by mail, telephone, computer and/or the Internet;

·	credit risks;

·	higher than anticipated levels of defaults on loans;

·	perceptions by depositors about the safety of their deposits;

·	capital adequacy;

·	the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;

·	ability to weather the current economic downturn;

·	loss of consumer or investor confidence;

·	availability of liquidity sources;

·	the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains, revenue growth and/or expense savings from such endeavors;

·	changes in laws and regulations, including tax, banking and securities laws and regulations;

·	changes in the requirements of regulatory authorities;

·	changes in accounting policies, rules and practices;

·	cost and difficulty of implementing changes in technology or products;

·	the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and

·	other factors and information described in this report and in any of the other reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. We have no obligation, and do not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. We have expressed our expectations, beliefs and projections in good faith and believe they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts, except per share data, are in thousands)

Changes in Financial Condition

During the first nine months of 2010, we focused on increasing deposits, investing those funds into relatively safe securities issued by government sponsored enterprises, and monitoring and maintaining our existing loan portfolio, including higher amounts of nonaccrual and other problem loans, and foreclosed assets. Unemployment rates in Oconee and Anderson continue to be elevated at 10.9% and 10.7%, respectively, for September 2010. These levels are slightly lower than the rates reported as of June 30, 2010, primarily as a result of a smaller labor force in each county during the September measurement period. The Federal Reserve Board recently indicated that it believes that a prolonged period of time will be required before economic activity will return to the levels seen prior to the beginning of the recent recession.

Deposit growth during the first nine months of 2010 totaled $21,730, an increase of 5.0% over the amount of deposits held at the end of 2009. This increase was achieved without increasing the rates paid. Time deposits accounted for all of the growth, increasing by $26,271, or 8.4%. During the third quarter of 2010, we became concerned that we would not be able to profitably employ funds that might be acquired if rapid growth in our deposits continued. Consequently, we adjusted downward the rates we are paying for new time deposits in an attempt to more closely align our need for such funds with their acquisition.

Also during the first nine months of 2010, we were again faced with the task of reinvesting the proceeds of significant cash inflows resulting from maturities, calls and paydowns of securities. Current monetary policy has resulted in the prolonged maintenance of interest rates at historic lows. A large number of our securities holdings contain call provisions that allow their issuers to redeem their previously issued securities and refinance their debts at lower rates. During the first nine months of 2010, we received $88,884 in proceeds from such calls. When call proceeds are received, we generally seek to reinvest into a similar security. If our goal is to reinvest in a new issue with a time-to-maturity that is similar to the maturity of the security previously held, we will generally realize a lower yield. If, on the other hand, we seek to maintain the yield, either the time-to-maturity of the replacement security will be longer than that of the security previously held and may cause us to be subject to higher amounts of interest rate risk, or, the creditworthiness of the issuer will be lower, thus increasing credit risk. Our current priority is to realize an adequate return on our investments while maintaining their market values. The majority of securities purchased in 2010 have maturities ranging from 5 to 10 years.

Loan quality deteriorated during the first nine months of 2010. Nonaccrual loans increased by $1,092, or 7.9%, and foreclosed assets increased by $2,475. Net loan charge-offs during the 2010 nine month period were $464 more than in the same period of 2009.

We believe that our liquidity position continues to provide us with sufficient flexibility to fund loan requests or make investments in securities at acceptable yields, and to meet normal demands for deposit withdrawals by our customers. We also believe that our current exposure to interest rate risk is at an acceptable level.

Results of Operations

Three Months Ended September 30, 2010 and 2009

We recorded consolidated net income of $386 for the third quarter of 2010, compared with $320 for the third quarter of 2009. After deducting amounts applicable to preferred stock and not available to common shareholders, net income per common share, assuming dilution, was $.09 for the 2010 quarter and $.08 for the 2009 quarter. Net income per common share amounts for 2009 have been retroactively adjusted to reflect a five percent stock dividend effective December 15, 2009.

Net interest income for the 2010 third quarter was $3,364, an increase of $340, or 11.2%, over the 2009 third quarter. Total interest income for the 2010 third quarter was $187 lower than for the 2009 third quarter primarily due to lower amounts of loans outstanding and lower interest rates earned on investment securities. Total interest expense for the 2010 third quarter was $527, or 19.5%, lower than for the same period of 2009 due primarily to lower interest rates paid for deposits.

The provision for loan losses for the third quarter of 2010 increased slightly to $1,025, compared with $1,010 for the third quarter of 2009 due to higher levels of net charge-offs, and higher flow-through of nonaccrual loans and potential problem loans in the 2010 period. Other factors, including continued high levels of unemployment and lower valuations of collateral such as commercial and residential real estate, also contributed to the higher loss provision in the 2010 period.

Noninterest income for the third quarter of 2009 decreased by $36 from the same 2009 period primarily due to a $58 reduction in the amount of service charges on deposit accounts.

Noninterest expenses for the 2010 period increased by $193 over the 2009 amount primarily due to higher expenses for FDIC insurance, higher legal fees related to problem loans and the acquisition of foreclosed assets, and increased expenses incurred to carry foreclosed assets.

	Summary Income Statement
	(Dollars in thousands)
For the Three Months Ended September 30,	2010		2009		Dollar Change			Percentage Change
Interest income	$	5,543	$	5,730	$	(187	)		-3.3	%
Interest expense		2,179		2,706		(527	)		-19.5	%
Net interest income		3,364		3,024		340			11.2	%
Provision for loan losses		1,025		1,010		15			1.5	%
Noninterest income		668		704		(36	)		-5.1	%
Noninterest expenses		2,490		2,297		193			8.4	%
Income tax expense		131		101		30			29.7	%
Net income	$	386	$	320	$	66			20.6	%

Nine Months Ended September 30, 2010 and 2009

We recorded consolidated net income of $992 for the first nine months of 2010 compared with $1,223 for the first nine months of 2009. After deducting amounts applicable to preferred stock and not available to common stockholders, net income per common share, assuming dilution, was $.23 for the 2010 nine months and $.32 for the same period of 2009. Net income per common share amounts for 2009 have been retroactively adjusted to reflect a five percent stock dividend effective December 15, 2009.

Net interest income for the first nine months of 2010 increased by $1,193, or 13.5%, over the 2009 amount primarily due to lower rates paid for interest bearing deposits.

Noninterest income for the first nine months of 2010 decreased by $131, primarily as a result of the non-recurrence of gains on sales of securities available-for-sale in the 2009 nine month period of $90 and a $119 reduction in the amount of service charges on deposit accounts.

Noninterest expenses for the first nine months of 2010 increased by $618 primarily as a result of higher legal expenses, increased assessments for deposit insurance and higher expenses for carrying foreclosed assets.

	Summary Income Statement
	(Dollars in thousands)
For the Nine Months Ended September 30,	2010		2009		Dollar Change			Percentage Change
Interest income	$	16,685	$	17,374	$	(689	)		-4.0	%
Interest expense		6,662		8,544		(1,882	)		-22.0	%
Net interest income		10,023		8,830		1,193			13.5	%
Provision for loan losses		3,275		2,460		815			33.1	%
Noninterest income		1,896		2,027		(131	)		-6.5	%
Noninterest expenses		7,438		6,820		618			9.1	%
Income tax expense		214		354		(140	)		-39.5	%
Net income	$	992	$	1,223	$	(231	)		-18.9	%

Net Interest Income

Three Months Ended September 30, 2010 and 2009

For the third quarter of 2010, net interest income totaled $3,364, an increase of $340 from $3,024 for the same period of 2009. The interest rate spread for the third quarter of 2010 was 2.45%, compared with 2.28% for the same period of 2009. Net yield on earning assets for the 2010 third quarter was 2.70%, compared with 2.68% for the 2009 third quarter. The discrepancy between the change in the net yield on earning assets as compared with the change in the interest rate spread is due to a larger percentage increase in the amount of average interest bearing liabilities than in average interest earning assets. In addition, there was a significant reduction in the average amount of loans (which earn interest generally at a higher rate of interest) and a larger increase in the average amounts of investment securities.

Interest expense for the 2010 three month period was $527 lower than for the same period of 2009, primarily due to lower rates paid for interest bearing deposits, Rates paid for all types of interest bearing deposits in the 2010 quarter were 78 basis points lower than rates paid for those funds in the 2009 quarter.

	Average Balances, Yields and Rates
	Three Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Yields/			Average			Income/		Yields/
	Balances			Expense		Rates (1)			Balances			Expense		Rates (1)
	(Dollars in thousands)
Assets
Interest-bearing balances due from banks	$	41,788		$	28		0.27	%	$	22,205		$	14		0.25	%
Securities
Taxable		168,778			1,258		2.96	%		133,282			1,298		3.86	%
Tax exempt (2)		18,516			188		4.03	%		19,780			201		4.03	%
Total investment securities		187,294			1,446		3.06	%		153,062			1,499		3.89	%
Other investments		1,244			1		0.32	%		1,307			3		0.91	%
Federal funds sold		-			-		0.00	%		-			-		0.00	%
Loans (2) (3) (4)		263,210			4,068		6.13	%		271,751			4,214		6.15	%
Total interest earning assets		493,536			5,543		4.46	%		448,325			5,730		5.07	%
Cash and due from banks		1,930								5,249
Allowance for loan losses		(6,562	)							(5,373	)
Valuation allowance - Available-for-
sale securities		3,481								828
Premises and equipment		8,443								8,565
Other assets		24,717								18,715
Total assets	$	525,545							$	476,309

Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts	$	56,690		$	77		0.54	%	$	52,724		$	93		0.70	%
Savings		20,578			22		0.42	%		17,663			20		0.45	%
Time deposits $100M and over		152,126			806		2.10	%		131,673			904		2.72	%
Other time deposits		193,587			1,204		2.47	%		173,608			1,596		3.65	%
Total interest bearing
deposits		422,981			2,109		1.98	%		375,668			2,613		2.76	%
Short-term borrowings		-			-		0.00	%		19			-		0.00	%
Long-term debt		6,500			70		4.27	%		9,500			93		3.88	%
Total interest bearing
liabilities		429,481			2,179		2.01	%		385,187			2,706		2.79	%
Noninterest bearing demand deposits		43,418								43,500
Other liabilities		3,192								6,119
Shareholders' equity		49,454								41,503
Total liabilities and shareholders'
equity	$	525,545							$	476,309
Interest rate spread							2.45	%							2.28	%
Net interest income and net yield
on earning assets				$	3,364		2.70	%				$	3,024		2.68	%
Interest free funds supporting earning
assets	$	64,055							$	63,138
_________________________________________
(1) Yields and rates are annualized.
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent basis.
(3) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.

Nine Months Ended September 30, 2010 and 2009

For the first nine months of 2010, net interest income totaled $10,023, an increase of $1,193, or 13.5%, over the $8,830 amount for the same period of 2009. The interest rate spread for the 2010 nine month period was 2.43%, an increase of 24 basis points over the 2.19% spread for the 2009 period. The yield on interest earning assets decreased to 4.49% for the 2009 period, compared with 5.12% for the 2009 period, primarily due to lower rates earned on investment securities. During the first nine months of 2010, we earned an average rate of 3.39% on our investment securities, compared with an average rate of 4.15% during the same period of 2009. Maturities, calls and paydowns of securities in the twelve months ended September 30, 2010 totaled $120,239 and purchases totaled $156,083. Generally, yields on the called, matured and paid-down securities were higher than the yields we were able to obtain on the recently purchased securities.

Rates paid for interest bearing liabilities during the 2010 nine month period were 87 basis points lower than for the 2009 nine month period. Rates paid for time deposits $100 and over were 97 basis points lower during the 2010 period than in the 2009 period and rates paid for other time deposits decreased by 120 basis points compared with the same 2009 period. The average amounts of time deposits outstanding during the 2010 period were $38,042, or 12.6%, more than in the 2009 period.

	Average Balances, Yields and Rates
	Nine Months Ended September 30,
	2010								2009
				Interest								Interest
	Average			Income/		Yields/			Average			Income/		Yields/
	Balances			Expense		Rates (1)			Balances			Expense		Rates (1)
	(Dollars in thousands)
Assets
Interest-bearing balances due from banks	$	54,473		$	98		0.24	%	$	19,291		$	36		0.25	%
Securities
Taxable		156,916			3,875		3.30	%		137,055			4,260		4.16	%
Tax exempt (2)		19,133			584		4.08	%		20,043			612		4.08	%
Total investment securities		176,049			4,459		3.39	%		157,098			4,872		4.15	%
Other investments		1,285			3		0.31	%		1,283			3		0.31	%
Federal funds sold		-			-		0.00	%		2,649			3		0.15	%
Loans (2) (3) (4)		265,240			12,125		6.11	%		273,201			12,460		6.10	%
Total interest earning assets		497,047			16,685		4.49	%		453,522			17,374		5.12	%
Cash and due from banks		1,944								6,953
Allowance for loan losses		(6,271	)							(5,439	)
Valuation allowance - Available-for-
sale securities		2,578								1,178
Premises and equipment		8,501								8,611
Other assets		23,495								15,975
Total assets	$	527,294							$	480,800

Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts	$	55,231		$	244		0.59	%	$	55,107		$	281		0.68	%
Savings		28,862			79		0.37	%		22,607			63		0.37	%
Time deposits $100M and over		148,255			2,285		2.06	%		131,612			2,987		3.03	%
Other time deposits		192,568			3,835		2.66	%		171,169			4,938		3.86	%
Total interest bearing
deposits		424,916			6,443		2.03	%		380,495			8,269		2.91	%
Short-term borrowings		-			-		0.00	%		14			-		0.00	%
Long-term debt		7,451			219		3.93	%		9,500			275		3.87	%
Total interest bearing
liabilities		432,367			6,662		2.06	%		390,009			8,544		2.93	%
Noninterest bearing demand deposits		44,258								44,567
Other liabilities		3,654								4,998
Shareholders' equity		47,015								41,226
Total liabilities and shareholders'
equity	$	527,294							$	480,800
Interest rate spread							2.43	%							2.19	%
Net interest income and net yield
on earning assets				$	10,023		2.70	%				$	8,830		2.60	%
Interest free funds supporting earning
assets	$	64,680							$	63,513
_________________________________________
(1) Yields and rates are annualized.
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent basis.
(3) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.

Provision and Allowance for Loan Losses

The provision for loan losses was $1,025 for the third quarter of 2010 compared with $1,010 for the third quarter of 2009. For the first nine months of 2010, the provision for loan losses was $3,275, compared with $2,460 for the first nine months of 2009. At September 30, 2010, the allowance for loan losses was 2.42% of loans, compared with 2.26% at December 31, 2009 and 2.01% as of September 30, 2009. The increase in the provision and allowance was made as a result of continuing elevated amounts of nonaccrual and potential problem loans, further erosion of collateral values, increased net charge-offs, and heightened concerns about the state of the local economy and the resultant ability of the Company’s customers to perform in accordance with the terms of their loans.

For the first nine months of 2010, net charge-offs totaled $2,991, compared with $2,527 in net charge offs during the same period of 2009. As of September 30, 2010, nonaccrual loans totaled $14,962 and there were no loans 90 days or more past due and still accruing interest. As of September 30, 2009, nonaccrual loans totaled $14,884. The activity in the allowance for loan losses is summarized in the table below:

	Nine Months Ended September 30, 2010			Year Ended December 31, 2009			Nine Months Ended September 30, 2009
	(Dollars in thousands)
Allowance at beginning of period	$	6,052		$	5,475		$	5,475
Provision for loan losses		3,275			4,355			2,460
Net charge-offs		(2,991	)		(3,778	)		(2,527	)
Allowance at end of period	$	6,336		$	6,052		$	5,408
Allowance as a percentage of loans outstanding
at period end		2.42	%		2.26	%		2.01	%
Loans at end of period	$	261,904		$	267,248		$	269,725

Non-Performing and Potential Problem Loans

	Nonaccrual Loans			90 Days or More Past Due and Still Accruing		Total Nonperforming Loans			Percentage of Total Loans			Potential Problem Loans			Percentage of Total Loans
	(Dollars in thousands)
January 1, 2009	$	11,799		$	-	$	11,799			4.36	%	$	6,910			2.56	%
Net change		2,835			-		2,835						2,367
March 31, 2009		14,634			-		14,634			5.31	%		9,277			3.37	%
Net change		2,882			-		2,882						(1,511	)
June 30, 2009		17,516			-		17,516			6.41	%		7,766			2.84	%
Net change		(2,632	)		-		(2,632	)					3,490
September 30, 2009		14,884			-		14,884			5.52	%		11,256			4.17	%
Net change		(1,014	)		-		(1,014	)					(3,951	)
December 31, 2009		13,870			-		13,870			5.19	%		7,305			2.73	%
Net change		2,575			-		2,575						(3,844	)
March 31, 2010		16,445			-		16,445			6.15	%		3,461			1.29	%
Net change		(603	)		-		(603	)					(403	)
June 30, 2010		15,842			-		15,842			5.97	%		3,058			1.15	%
Net change		(880	)		-		(880	)					2,195
September 30, 2010	$	14,962		$	-	$	14,962			5.71	%	$	5,253			2.01	%

Potential problem loans include loans, other than non-performing loans, that management has identified as having possible credit problems sufficient to cast doubt upon the abilities of the borrowers to comply with the current repayment terms. Such loans are assigned to one of several below-average risk-rating grades depending on factors such as past due status, collateral values, and other factors affecting the customers’ ability to repay. As of September 30, 2010, approximately 25% of our potential problem loans were included in the least severe below-average risk-rating grade. Approximately 97% of potential problem loans were secured by real estate. Management expects that little or no improvement of economic conditions within our market areas is likely in the short-term, especially with respect to real estate related activities and real property values. Consequently, it is expected that provisions for loan losses will continue to be relatively high in the immediate future.

The statewide unemployment rate for South Carolina was 11.0% (seasonally adjusted) as of September 2010, compared with 11.6% (seasonally adjusted) as of September 2009. The unemployment rates (not seasonally adjusted) in Oconee and Anderson Counties, South Carolina were 10.9% and 10.7%, respectively, as of September 2010 compared with 14.2% and 12.5%, respectively, as of September 2009.

Noninterest Income

Noninterest income totaled $668 for the third quarter of 2010, compared with $704 for the 2009 quarter. Service charges on deposit accounts were $58 lower in the 2010 period due to lower volumes of fee-related activity. However, fees associated with debit cards increased by $29 over the 2009 third quarter amount due to higher usage of this payment option.

For the nine months ended September 30, 2010, noninterest income totaled $1,896, compared with $2,027 for the same period of 2009. Service charges on deposit accounts in the 2010 period were $119 less than in the same period of 2009. Fees associated with debit cards were $83 higher in the 2010 period.

Noninterest Expenses

Noninterest expenses totaled $2,490 for the third quarter of 2010, compared with $2,297 for the third quarter of 2009. Deposit insurance expenses for the 2010 period were $68 more than for the same period of 2009 due to increased amounts of insured deposits and higher assessment rates, and legal fees primarily related to problem loans and foreclosed properties, and expenses for carrying foreclosed properties were $51 higher in the 2010 period.

Noninterest expenses for the nine months ended September 30, 2010 totaled $7,438, compared with $6,820 for the same period of 2009. Salaries and employee benefits decreased by $103 from the amount for 2009. We allowed a few job vacancies to go unfilled for a relatively prolonged period during 2010; those positions were filled near the end of the second quarter of 2010. Amounts assessed for FDIC insurance increased by $331 due to the recently enacted permanent increase in the deposit insurance limit to $250 per insured account and other changes to the assessment calculation. Expenses associated with foreclosed assets increased by $165 over the 2009 period because we now hold more properties and some of the properties have been held for a prolonged period of time. Expenses for professional services increased by $141 for the 2010 period primarily due to legal fees paid for assistance with problem loans and foreclosures.

We continue to pursue a strategy to increase our market share in our local market areas in Anderson and Oconee Counties of South Carolina. Oconee County is served from two offices in Seneca, and one office in each of Walhalla and Westminster. The Anderson County market is served from two offices in Anderson and one office in Williamston.

Liquidity

Liquidity is the ability to meet current and future obligations through the liquidation or maturity of existing assets or the acquisition of additional liabilities. We manage both assets and liabilities to achieve appropriate levels of liquidity. Cash and short-term investments are our primary sources of asset liquidity. These funds provide a cushion against short-term fluctuations in cash flow from both deposits and loans. Securities available-for-sale are the principal source of secondary asset liquidity. However, the availability of this source is influenced by market conditions. Individual and commercial deposits are the primary source of funds for credit activities. We also have significant amounts of credit availability under our FHLB lines of credit and Federal Reserve Bank Discount Window facilities.

As of September 30, 2010, the ratio of loans to total deposits was 57.1%, compared with 61.2% as of December 31, 2009. We believe that liquidity sources are adequate to meet our operating needs.

Capital Resources

Our capital base increased by $2,524 since December 31, 2009 as the result of net income of $992 for the first nine months of 2010, an increase of $17 from the exercise of stock options, plus a $1,633 change in unrealized gains and losses on available-for-sale securities, net of deferred income tax effects, less $118 dividends paid on preferred stock. Any unrealized losses on available-for-sale securities are not considered to be other than temporary. Our available-for-sale securities primarily consist of debt issuances of government-sponsored enterprises. Even though these instruments are not directly guaranteed by the U. S. Government, they are generally considered to be of high quality and default risk is believed to be remote. Therefore, the changes in market values are believed to be the result only of changes in market interest rates. We currently have both the intent and the ability to hold such securities until the market value recovers, including until maturity.

The Company and its banking subsidiary (the “Bank”) are subject to regulatory risk-based capital adequacy standards. Under these standards, bank holding companies and banks are required to maintain certain minimum ratios of capital to risk-weighted assets and average total assets. Under the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), federal bank regulatory authorities are required to implement prescribed “prompt corrective actions” upon the deterioration of the capital position of a bank. If the capital position of an affected institution were to fall below certain levels, increasingly stringent regulatory corrective actions are mandated.

The September 30, 2010 risk based capital ratios for the Company and the Bank are presented in the following table, compared with the “well capitalized” and minimum ratios under the regulatory definitions and guidelines:

		Total
	Tier 1	Capital	Leverage
Community First Bancorporation	14.4%	15.6%	8.7%
Community First Bank	12.9%	14.2%	7.7%
Minimum "well-capitalized" requirement	6.0%	10.0%	6.0%
Minimum requirement	4.0%	8.0%	5.0%

Off-Balance-Sheet Arrangements

In the normal course of business, the Bank is party to financial instruments with off-balance-sheet risk including commitments to extend credit and standby letters of credit. Such instruments have elements of credit risk in excess of the amount recognized in the balance sheet. The exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. Generally, we use the same credit policies when extending loan commitments and standby letters of credit as are used when we extend loans.

Following are the off-balance-sheet financial instruments whose contract amounts represent credit risk:

	September 30, 2010
	(Dollars in thousands)
Loan commitments	$	29,899
Standby letters of credit		846

Loan commitments involve agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and some involve payment of a fee. Many of the commitments are expected to expire without being fully drawn; therefore, the total amount of loan commitments does not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include commercial and residential real properties, accounts receivable, inventory and equipment.

Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is the same as that involved in making loan commitments to customers. Many letters of credit will expire without being drawn upon and do not necessarily represent future cash requirements. The Bank receives fees for loan commitments and standby letters of credit. The amount of such fees was not material for either the nine months or three months ended September 30, 2010.

As described under “Liquidity,” management believes that its various sources of liquidity provide the resources necessary for the Bank to fund the loan commitments and to perform under standby letters of credit, if the need arises. Neither the Company nor the Bank is involved in other off-balance sheet contractual relationships or transactions that could result in liquidity needs or other commitments or significantly impact earnings.

Item 4T. – Controls and Procedures

Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the issuer’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer’s chief executive officer and chief financial officer concluded such controls and procedures, as of the end of the period covered by this report, were effective.

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6. - Exhibits

Exhibits

31. Rule 13a-14(a)/15d-14(a) Certifications

32. Certifications Pursuant to 18 U.S.C. Section 1350

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COMMUNITY FIRST BANCORPORATION

November 15, 2010		/s/ Frederick D. Shepherd, Jr.
Date		Frederick D. Shepherd, Jr., Chief Executive Officer and
		Chief Financial Officer

EXHIBIT INDEX

31. Rule 13a-14(a)/15d-14(a) Certifications

32. Certifications Pursuant to 18 U.S.C. Section 1350